Working Capital Management Analysis: A Case Study of HAECO (BUS8102)

This case study examines the working capital management of Hong Kong Aircraft Engineering Company Limited (HAECO). The research investigates the impact of inventory on working capital and its subsequent effect on profitability, as well as the implications of the Airbus A380 termination. The study utilizes secondary data, primarily from HAECO's annual reports, and employs a descriptive illustrative approach with quantitative analysis, including ratio analysis to assess financial efficiency and liquidity. Key variables such as Net Operating Profitability, Average Collection Period, Average Payable Period, and Cash Conversion Cycle are analyzed to understand the dynamics of working capital. The findings highlight the significance of working capital in organizational performance, particularly in the context of HAECO's financial health and the challenges posed by market dynamics and economic crises. The research also examines the role of the firm's financial statements to evaluate the WCM in the company and the impact on the company's profitability.

Haeco’s Working Capital Management 1
A CASE STUDY ON HAECO’S WORKING CAPITAL MANAGEMENT
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Haeco’s Working Capital Management 2
1) Abstract
This research critically analyses the procedures relevant for investigating the Working
Capital Management (WCM) in the HAECO Company. Indeed, the firm’s inventory records
significantly affect the working capital, which resultantly determines the position of the
company in terms of profitability. This comprehensively, answers the research questions
involving the termination of the Airbus A380 and determination of the company’s working
capital using quantitative data. Secondary information drawn from relevant literature source,
including the financial data from the company’s website will be used to evaluate the WCM.
The findings in this paper acknowledge the significance of working capital in an organization
considering the relevant assets and liabilities. Therefore in context, this research tends to use
a statistical approach i.e. regression analysis to critically evaluate the research problem. The
working capital significantly affects the performance of sales in HAECO, which has a
significant relation to the WCM. This relationship is further enumerated by the use of the
regression analysis presented in this research.

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Table of Contents
1) Abstract..................................................................................................................................2
2) Introduction............................................................................................................................5
Importance of the Problem.....................................................................................................5
What Is Lacking In the Current Knowledge..........................................................................5
Objectives of the Study..........................................................................................................5
3) Methods.................................................................................................................................6
Context and Setting of the Study...........................................................................................6
Study Design..........................................................................................................................7
Main Study Variables.............................................................................................................7
Data Collection Instruments and Procedures.........................................................................8
Analysis Methods.................................................................................................................11
4) Results..................................................................................................................................13
Data Collection and Recruitment.........................................................................................13
Key Findings........................................................................................................................14
Secondary Findings..............................................................................................................16
5) Discussion & Conclusion.....................................................................................................16
Main Findings......................................................................................................................16
Main Results With Reference to Previous Research............................................................17
Policy and Practise Implications of the Results...................................................................17
Strengths and Limitations of the Study................................................................................18
Perspectives for Future Work...............................................................................................18
References................................................................................................................................19

Haeco’s Working Capital Management 4
2) Introduction
Importance of the Problem
This research analyses a critical problem of HAECO’s Working Capital Management
(WCM) concerning how it will hold its aircraft creation classes. Analysing this issue is
essential since effective capital management enhances the company’s operations, including
evaluating its financial health and success. The evaluation of WCM is vital since the
servicing costs of the company’s products depend on the status and age of the aircraft.
Effective inspection is necessary before the management of HAECO begins to work on the
aircraft to comprehend the status of its making and manufacturing. There is also a need to
critically analyse WCM in relation to the company’s future directions of terminating the
Airbus A380 in 2022 due to financing issues and the lacking manufacturers of the product
parts.
What Is Lacking In the Current Knowledge
There is a gap in research, which relates to profitability and needs analysis. The issue
of enhancing profits in the liquidity costs can lead to critical evaluation of operation problems
in the company (Afrifa and Padachi, 2016). If the company does not consider the aspect of
profitability, it will not survive the market for a long time. Another gap in research concerns
liquidity, whereby companies might be subjected to bankruptcy or insolvency. For this
rationale, the WCM need to be given enough consideration since it principally affects the
firm’s profitability.
Objectives of the Study
The main objective of this research is to:
- Analyse the financial efficiency of the company by considering the assumptions in the
WCM

Haeco’s Working Capital Management 5
- Evaluating the implications of terminating the Airbus aircraft category under the
company’s WCM.
3) Methods
Context and Setting of the Study
This research is designed based on a critical evaluation of exiting literature, which
reinforces the WCM and its implications on the company’s profitability. In the evaluation
done, the information utilized to compose this paper has been drawn from the company’s
website to retrieve meaningful and appropriate data about WCM. Airline industries are
functioning in a dynamic sector and are influenced promptly by terrorist conditions and
economic crises. One of the crises includes terrorist attacks that happened in the Gulf –
September 11th in the United States. Moreover, the increase in the prices of fuel in the globe
escalates significantly the costs of the airline firms.
Due to the increased costs, WCM is fundamental and needs to be executed
professionally and carefully to sustain the company’s operation, enhance profitability and
overcome the implication of financial crises without causing any possible threats (Hoang,
2015). This research is conducted in consideration to the relationship between the company’s
profitability and the working capital. The information collected has been obtained from the
relevant financial statement as at 2017 to 2018 retrieved from the company’s website. The
main desire for this evaluation is to evaluate the liquidity of firms with the use of current
ratios (%), cash ratios (%) among other ratios (%). Moreover, this study is designed centred
on account receivable turnovers based on days, inventory turnovers, and overall working
capital turn-over rates and liabilities & assets utilized to analyses the efficiency of WCM.

Haeco’s Working Capital Management 6
Study Design
The study design used to compose this research paper analyses and measures relevant
financial data in the company. In this manner, it will be possible to systematically solve the
pending gaps in research, which includes procedural allocation of research instruments and
data. The research design is applicable as a process utilized to organize the literature and data
in a procedural manner through critical understanding to statistical methods. In that case, this
research is a specific case study of the HAECO Company narrowed down to studying the
working capital management in the firm. Quantitative data has been used to critically
evaluate various key ratios used to investigate the problems, including the use of different
literature sources. For this case analysis, the study design applied will be descriptive
illustrative approach and entails proposals necessary for this form of design. This approach
necessitates the evaluation of research objectives critical to drawing conclusions and
presenting future directions on WCM (McCusker and Gunaydin, 2015). Considering this
quantitative approach, it is appropriate to undertake a quantitative evaluation that focusses on
answering the research questions and collecting reliable data to support financial
investigation and not just the opinions of the researchers (Singh, Kumar and Colombage,
2017).
Main Study Variables
This research utilizes secondary data from the company’s website to evaluate the
WCM. These are numerical data from HAECO’s site, whereby the information is used to
study key issues in the papers and identify the variables influencing WCM. The selection of
variables is stimulated by the evaluation of previous literature on working capital. All the
necessary main variables used to answer the research questions are include below:
 Net Operating Profitability (NOP – This variable analyses the company’s profitability
and is used as a dependent variable. This will be calculated as the operation revenue

Haeco’s Working Capital Management 7
added to the overall depreciation divided by the overall assets and deducting assets
(Masudin, Kamara, Zulfikarijah and Dewi, 2018).
 Average Collection Period (ACP) – This variable is applied as the proxy and a
collecting guideline, representing the independent variable. This will be calculated by
subdividing the accounts receivable sales then multiplying the overall outcome by 365
representing the number of days. The inventories turnover in terms of days applied as
the proxy for the proxy guideline is also taken as an independent variable.
 Average Payable Period (APP) – This is a variable applied as a proxy representing the
income guideline. This is also taken as an independent variable, which is evaluated by
subdividing the purchases then finding the product with the findings by the number of
days in a year (Afrifa and Padachi, 2016).
 Cash Conversion Cycle (CCC) – This variable will be used to critically evaluate the
WCM, and taken as an independent variable considered after adding the average
collection timeframe with the overall inventories turnovers in a year then subtracting
the average payment timeframe (Marzo and Scarpino, 2016).
Data Collection Instruments and Procedures
The data used to analyse the WCM is retrieved from the company’s website. The
financial information indicates a significant development in relevant quantities with the fiscal
year 2019 only eliminated. In the years 2017 and 2018, an exceptional rise in financial
income was evident (From HK$ 6,801 to HK$ 6,959) (Haeco.com, 2019). A surplus capacity
of the company’s stock indicates minimal turnover ratios and increased debtors indicate
liquidity issues in HAECO. Trade debtors subsequently requiring progressive development
till 2017 deteriorate to partial the amount of its figure in 2017 by the same amount. Moreover,
the diminishing quantities of the revenue indicate that the company is placing optimal
revenue balance to prevent dormant revenue existing in the company. Advances and loans

Haeco’s Working Capital Management 8
had shown the management a significant trend in the financial income. However, it
approximately account for a minimal segment of the overall present assets, which need to be
managed effectively to allow significant management of capital, including original utility of
funds. Swift company’s assets indicate the same scenarios like the trading receivables.
Figure 1: Profit/Loss Ended 30th June 2018
Until 2018, the overall working capital, i.e., all out current resources or assets sprung
out with a fourfold increment in its incentive with a stringent fall in its expansion by 2017
and a short time later decrease followed by the return to its prior estimations of 2017 as at

Haeco’s Working Capital Management 9
June. Ratio examination gives us an increasingly explicit picture of business elements of the
firm’s working capital (Ghadge, Karantoni, Chaudhuri and Srinivasan, 2018). Fund turnover
proportion has demonstrated to us an expanding pattern, contacting its most astounding
figures in 2018 proceeded with decrease to half of its qualities in 2017. In any case,
significantly it had demonstrated to us a high increment, very first of its own history. Stock
turnover proportion has a fluctuating situation as indicated in Fig 1, delineating that there
exist no change in the effectiveness of use of its inventories as a piece of its working capital.
In 2017, with the general economy decrease, the proportion returns to a circumstance
same as HAECO’s, impelling a general closeness of circumstances considering the
worldwide budgetary emergency followed by an adjustment in its proprietorship in 2018
when the organization held an overall financial deficit. The decrease in sales in 2017
facilitated the necessity to consider future planning for the enhancement of profitable
financial transactions and save businesses from financial crises ((Hailu and Venkateswarlu,
2016). For a long time now, the firm is improving its effectiveness in dealing with the
obligations and in this way, is having most extreme transactions with least accounts
receivables after 2018. Net working capital turnover proportion with a fluctuating pattern all
through is having a consistent ascension after 2018 portraying the firm’s effectiveness to
ideally use its working capital. It actuates us that with the progression of time the firm is
increasingly finding out about the viable and effective administration of working capital and
is becoming step-by-step financially stable regardless of the antagonistic economic situations.
Current Assets are expanding very progressively after the procurement period, and
after 2018, they are very steady with a collapse in 2017 and high rates of tax imposed
(Kasiran, Mohamad and Chin, 2016). The firm is attempting to oversee them all the more
proficiently. In spite of the fact that the firm is as yet causing misfortunes, it is struggling to
upgrade its productivity considering problem evident from the investigation conducted on the

Haeco’s Working Capital Management 10
business’ level. For the analysis, the company is expanding, which means that the turnover
rate is decreasing significantly.
Analysis Methods
This paper will depend on the examination of quantitative information and the kind of
information selected for investigation is reliant upon the relevant financial data on the
company’s website. The data retrieved from a company’s site represent the required
information used to calculate and evaluating an entity’s financial statements, including the
WCM (Inkinen, 2016). A portion of the budgetary instruments, that assistance in breaking
down the information defining the effect of stocks on working capital includes ratio analyses.
Ratio analyses would help in estimating the productivity of working capital administration
and liquidity in HAECO. A portion of the proportions that would be registered to break down
the effect of stock on the working capital administration incorporate current proportion,
analysis proportion, stock turnover proportion, financial ratio, records of sales proportion,
organizing capital turnover and profit for resources. The proportions and equations, which are
utilized in this examination to quantify the productivity of liquidity and working capital
administration, are shown below.
Current Ratio: It demonstrates the capacity to pay present moment and long-term liabilities
with current resources of the business. The proportion shows whether it has or not ampleness
for supporting its activities, in the event that unforeseen circumstances happen. The
proportion is speculated to be 2:1. In any case, this proportion is near 1.5:1 in creating ratios
since liquidity is not excessively high. Consequently, it is viewed as adequate.
Cash Ratios (%): This ratio signifies the capabilities of repaying short-term debts whenever
sales diminish, accounts receivables are not retrieved.

Haeco’s Working Capital Management 11
Account Receivable Turnovers: It indicates the capabilities of gathering debts in the
company. A greater ratio is needed; however, inferior accounts receivable turnovers are terms
of days are recommendable.
Inventory turnovers indicate how efficient inventories in the company are. The conversion
time to cash is evaluated by 365 days subdivided using the inventory turnovers (Cuervo‐
Cazurra, Mudambi, Pedersen and Piscitello, 2017)
Overall working capital turnovers: These ratios are applicable when evaluating the working
capital efficacy (Nobanee and Abraham, 2015). In this case, a greater rate is recommended.
Return on Assets: Used to reflect the firm’s efficiency using relevant assets to create
earnings.
Our investigation utilizes a statistical evaluation, regression examination of cross-sectional
and time arrangement information. We utilize the joint Regression kind of board information
examination. The joint Regression, likewise called the consistent coefficients model is one
where the two blocks and slants are steady, where the cross segment firm’s information and
time arrangement information are combined together in a solitary segment expecting that
there is no noteworthy cross segment or transient impacts (Aminu and Zainudin, 2015). The
general type of our model is:
NO Pπ= βo+∑
ii
n
βi Xti+∈ (1)
NO Pπ Represents the overall operating profitability in the company at a certain time
βo Shows the equation intercept
βi Indicates the X coefficient variable
X Shows the independent variable of the WCM in the company at ti which shows the time in
months (1, 2……..6)

Haeco’s Working Capital Management 12
∈ This indicates the error term
Definitely, if the above overall least square model in converted into the research specific
model, it become as shown below.
NO P¿=βo+ β 1 ( AC P¿ ) + β 2 ( ITI D¿ )
+β 3 ( AP P¿ ) + β 4 ( CC C¿ ) + β 5 ( C R¿ )+ β 6 ( D R¿ ) + β 7 ( LO S¿ ) + β 8 ( FAT A¿ ) +ȩ (2)
Whereby NOP represents the Net Operating Profitability
ACP: Indicates the Average Collection Period
ITID: Shows the Inventories Turnover in Days
APP: Indicates the Average Payment Period
CCC: This is the Cash Conversion Cycle
CR is the Current Ration
DR is the Debt Ratio
LOS represents the Natural Log of Sales
FATA is the Financial Asset of Total Assets
ȩ Shows the error term
4) Results
Data Collection and Recruitment
Hong Kong Aircraft Engineering (HAECO) recorded a HK$127 million ($16.3
million) working benefit for the year finished 31 December 2016, down almost 70% from the
earlier year. Income for the year rose to HK$13.7 billion from the past HK$12.1 billion,
while working costs for the MRO bunch rose 16.8% to HK$13.6 billion. The MRO says the